Electric vehicles no threat to oil prices anytime soon

• The forecasts for EV growth are all over the map. Late last year investment research outfit Morningstar figured EVs will be 10% of new vehicle sales by 2025 (only 8 years from now!) compared to 1% in 2015. Washington’s Energy Information Administration (EIA) predicted in January cumulative sales of EVs (cars and light trucks) would push 1.4 million by 2025. Last month Morgan Stanley predicted 1 billion EVs would be sold by 2050 and 70% of European vehicles would be electric. Bloomberg New Energy Finance wrote a glowing report on EVs in early July titled The Electric Car Revolution is Accelerating stating “…adoption of emission-free vehicles will happen more quickly than previously estimated because the cost of building cars is falling so fast. The seismic shift will see cars with a plug account a third of the global auto fleet by 2040 and displace about 8 million barrels a day of oil production. In just eight years, electric cars will be as cheap as gasoline vehicles, pushing the global fleet to 550 million by 2050”. When Volvo recently announced it will only produce vehicles with electric motors of some sort – pure EV or hybrid – in a couple of years made global headlines.

• EV sales forecasts don’t look intimidating once all the numbers are presented. For perspective, how many cars are there in the world? According to Automotive News, in the U.S. alone there were 18.4 million new cars and light trucks sold in 2016. A year ago, U.S. research house Alliance Bernstein reported that in 2015 there were 1.1 billion cars and 377 million trucks on the world’s roads, quantities expected to rise to 1.5 billion and 507 million respectively by 2025 and 2 billion and 790 billion by 2040. These figures are interesting because if the number of vehicles doubles but EVs are only 25% by 2050 (Bloomberg’s high case) this doesn’t equate to an 8% reduction in oil demand. If the Morningstar prediction above comes true, this would equate to 8.8 million new EVs in 2025 based on worldwide sales of 88 million units in 2016. One of the big issues now emerging is the significant petroleum consumption and emissions of transport trucks for which electrification is not currently practical. And, of course, airplanes only run on refined crude. Bernstein figures Air Revenue Passenger Kilometers, or RPK, which was 9 trillion in 2015, will rise to 12 trillion in 2025 and more than double to 20 trillion by 2040. Oil required for transportation will continue to grow. Of a 42 US gallon barrel of crude 86% ends up transportation fuel (20 gallons gasoline, 12 diesel and 4 jet fuel). And EVs will only capture a meaningful portion of the market if several problems are solved, some highlighted below.

• Growth in EV sales thus far have been supported by significant government subsidies. The Tesla website points out just how much the sticker price of its vehicles can be reduced. In America, everyone gets a federal US$7,500 income tax credit then Louisiana adds on as much as US$9,500 “depending on battery choice”. A typical amount from is other states is an additional $1,000 to $$2,500. In Canada Ontario will chip in a Cdn$14,000 tax rebate plus carpool lane access for a single driver. Quebec is at Cdn$3,000 according to the Tesla website. But it is noteworthy how sales plunge when subsidies end. Website qz.com wrote on July 10 how “Nobody in Hong Kong Wants a Tesla Anymore”. Sales plummeted once the subsidy was capped at US$12,500 which raised the cost of one of the higher-end models to US$118,400 from US$72,900. In China BYD, which was once the world’s largest manufacturer of EVs thanks to domination of that market, saw EV sales drop 34% in Q1 2017 once state funding was reduced in January. Late last year Forbes wrote EV sales in Europe were declining in the fall of 2016. In April U.S. auto research firm Edmunds concluded, “Elimination of federal tax credits likely to kill U.S. EV market”, predicting EV sales would crash when the subsidies are withdrawn. Norway proudly trumpets how it has the highest level of EV adoption in the world, but the government pays people to do it. In a great article by thedrive.com in mid-July, the writer reports there are no sales taxes on EVs, owners don’t pay for vehicle registration, ferries and roads tolls are free, and they can drive in bus or HOV lanes. To make sure drivers get with the program Norway charges nearly US$7 a US gallon for gasoline. Norway gets all its EV subsidy money by selling oil to the rest of the world. At US$45 a barrel Norway’s average 2016 production of 2.1 million b/d was worth US$35 billion last year and its sovereign wealth fund is currently totals US$960 billion. Britain and France have announced that by 2040 – 23 years from now – vehicles powered only by ICEs will be banned. But however gloomy that may sound for the oil industry today, that is enough time for 6 elections in both countries which could change everything, the development of new technologies to make ICEs even cleaner and more efficient, and is sufficiently distant to be meaningless for all crude producers except the supermajors.

• Are EV’s really green? There has been much written about this subject but it doesn’t make headlines. You have to hunt for it. In article in wired.com on March of 2016 the writer questioned whether or not Tesla was really environmentally friendly. If you recharge with coal-fired electricity the emissions are higher than burning gasoline. The vehicles must be lighter to extend battery life so they require a lot of high performance metals which is hardly environmentally benign to produce (more on lithium later). A researcher wrote, “…the greenhouse gas emissions footprint of electric vehicles can be pretty high on the front end, as they’re being built. We’re shifting pollution, and in the process we’re hoping that it doesn’t have the environmental impact”. Then there’s the safe disposal of the battery after it dies and the local landfill is not the place. In June, the Montreal Economic Institute released a report that claimed subsidizing EVs was “an inefficient way to reduce CO2 emissions”. A spokesman said, “It’s just a waste. Not only do these programs costs taxpayers a fortune, but they also have little effect on GHG emissions”. The study claimed current subsidies in Quebec and Ontario, driven by lofty public government ambitions to grow EV use significantly, cost taxpayers Cdn$523 per tonne of reduced carbon emissions in Ontario and Cdn$288 in Quebec. The cap and trade system Ontario is adopting, mirroring than in California, taxes carbon at Cdn18 per tonne. Alberta’s new carbon tax, which the NDP are selling as a first step in saving the planet from climate change, is Cdn$20.

• Beware of looming electricity and lithium shortages. When Bloomberg did its analysis it predicted, “Electricity consumption from EVs will grow to 1,800 terawatt-hours in 2040, or 5 percent of global power demand, from 6 terawatt-hours in 2016”. This is a staggering 3,000 percent increase. Where will it come from? Better not be coal or possibly even natural gas. At a conference held April 3 in Calgary sponsored by ARC Energy Research Institute (AERI) a representative of Bruce Power, the Ontario nuclear electricity generator, said to economically reduce carbon emissions recharging EVs only made sense at night, not during peak load hours. If everybody drove their EVs to work and tried to plug in at the office it would overload the system. Meanwhile, there is speculation whether the world has enough lithium to build all the batteries skyrocketing EV growth would ensure. One analyst has predicted lithium shortages as soon as 2023 and have already delayed Tesla’s output. The solution, which is not all bad for the oil industry, is dual fuel whereby the battery is smaller, the lithium required per vehicle is lower, and mobility is augmented by a smaller ICE using good old-fashioned gasoline.

• Then there’s the morality of EV subsidies, which is rarely discussed in the pursuit of slaying the climate change beast. Until Tesla rolled out its Model 3 with a suggested sticker price of US$35,000, earlier models cost a small fortune restricting the number of people able to purchase one. At the AERI conference an automotive industry speaker noted Tesla dominated the market because it was “sexy”. But a look at used vehicle website showed these vehicles costing as much as Cdn$170,000, even second hand. Four pages of ads didn’t have one listed below Cdn$63,700. Is it politically acceptable that Ontario provides Cdn$14,000 in subsidies from all taxpayers to allow the richest people in the province to buy an EV in the same price range as a Porsche, Ferrari or Maserati? And while the subsidies are directed to the vehicle purchase so politicians can count sales numbers, the recharging network is years behind. This will require even more government money because in most places there is insufficient commercial demand for the private sector to justify the investment. EVs are range-restricted with 300 km. being the outer end. Then they take hours to recharge. Colder temperatures impair battery performance as every Canadian driver knows. Is this an intelligent and sustainable use of taxpayer dollars?

Kevin Libin, an editorial writer for the Financial Post, wrote a column July 11 titled, “The awesome, unstoppable revolutionary electric-car revolution that doesn’t actually exist”. He wrote, “…because nobody’s really driving these miracle machines, said mania has been limited to breathless news reports about how the EV revolution is about to rock our world. EVs comprise just two-tenths of a percent of all passenger vehicles in North America, despite the media’s endless hype and efforts of green-obsessed governments to cover much of the price tag”.

Libin continued, “The real story being missed is just how pathetic things look right now for electric cars. Gasoline prices in the U.S. turned historically cheap in 2015 and stayed cheap, icing demand for gasless cars…Tesla was rocked by a controversial Swedish study that found that making one of its car batteries released as much CO2 as eight years of gasoline-powered driving. And Bloomberg reported last week on a study by Chinese engineers that found electric vehicles, because of battery manufacturing and charging by fossil-fueled electricity, still emit-50 per cent more carbon than internal-combustion engines”.

Calgary’s voice of sober second on all matters oil, Peter Tertzakian of AERI, agreed with Libin in an article the same day. He wrote, “The demand for oil is as robust as it’s ever been, thanks to barrels that are priced 60 percent lower than they were three years ago.; the linkage of petroleum to the world economy is actually strengthening, not weakening. But it doesn’t matter. EV mania is affecting the psychology of investors who finance oil assets, services and infrastructure. Fog lights of reason are finding it increasingly difficult to see the future of oil past 2020, because a cloud of uncertainty is thickening around long-term demand”.

Tertzakian wrote how more people are asking him somewhat rhetorically, “Looks like the petroleum business is finished, eh?” He responds, “Really? Have you bought an electric car or hybrid?” and the answer is universally no. And nobody else has either. He figures there are two scenarios. The first is tighter capital will “clean out” inefficient oil producers but technology will help oil prices stay lower, “making the consumer decision to switch to EVs more difficult”. The other is shrinking capital investment reducing future production thus leading to a price spike. Tertzakian concludes, “Ironically, progressive oil companies will do well under both scenarios”.

Meanwhile, you won’t see any EVs in the oilpatch anytime soon. The EV maximum range of 300 km. remains what many in this business drive before mid-morning when there’s work to be done. And the destination is nowhere near a charging station.

By David Yager for Oilprice.com